Every month the National Association of Realtors reports the number of residential home sales and the median home sales price. We watch the numbers closely as we view them as directional indicators for the near-term health of the iBuying theme, in particular, for Zillow and Opendoor. Loup is an investor in Zillow and Opendoor.
While many people focus on the number of homes sold or average home sales price, we believe the most important metric is the total transaction value (TTV), approximated as the number of homes sold x the median sales price (while the average sales price would be more accurate and pull TTV higher, median is the industry standard). Good news for companies like Zillow and Opendoor, TTV has remained fairly stable over the past four months.
Said another way, we don’t look at unit sales or sale prices in isolation, but view them in combination, as TTV is a function of both volume and price inputs. The important thing for iBuyers is that the two are optimized, thereby driving higher TTV. It harkens back to when investors once viewed Google’s clicks-per-user and cost-per-click independently, and later in aggregate.
The chart below illustrates that although the number of monthly homes sold (green line) has declined for four consecutive months, TTV (black line) rose in March and April after moving lower in January and February:
The reason TTV is more important, in our opinion, is because we view Zillow and Opendoor as real estate transaction platforms, not home flippers or tech-enabled real estate agencies. Their goal is not to make a profit by selling homes for more than they paid, but to capture a percentage of the value exchanged in a home transaction by offering a better experience and value.
We estimate roughly 15% of a home’s value exchanges hands during a traditional transaction. This includes the standard ~6% in agent commissions, along with items such as buyer concessions, renovations and staging, transition and overlap costs, title, closing, and escrow services, mortgage, and home insurance. This 15% of a home’s value that is transferred during a sale is what we view as the opportunity for Zillow and Opendoor.
Putting it together, as TTV increases, so does Zillow’s and Opendoor’s total addressable markets.